The Government has recently reconfirmed its proposal to implement reforms around Lease extension and freehold enfranchisement in the current term of Parliament.
This follows the Government asking the Law Commission to review the law on enfranchisement with a view to making it simpler, easier, quicker and more cost effective and, controversially, to look at ways in which the price payable by leaseholders to acquire their freehold or a longer lease of their flat or house might be reduced.
The Law Commission consulted and published its recommendations Leasehold Home Ownership: Buying Your Freehold or Extending Your Lease.
The stated intention of the reforms is to “to help make our homes our own rather than someone else’s asset. They are intended to make the law work better for leaseholders”. The report is described as a ‘root and branch review of enfranchisement rights’.
The Law Commission subsequently published its options around how the premium might be reduced. It has also consulted around and recommendations made with regard to the right to manage and reinvigorating Commonhold. Short summaries for each are available at the LawComm website.
The terms of reference for all three projects include the promotion of transparency and fairness in the residential leasehold sector and the provision of a better deal for leaseholders as consumers. Some 102 recommendations are made in the report.
So what reforms can we expect the Government to introduce further to the Law Commission’s recommendations around Buying Your Freehold or Extending Your Lease and what will it mean for leaseholders of flats and houses and their landlords?
If the recommendations are implemented by Government then:
1. Flat leaseholders already holding a long lease that is subject to a ground rent that is deemed “onerous”, will be pleased to have the right to buy out the ground rent without having to compensate the landlord for the “onerous” element of it. That should offer a quicker solution to the alternative of claiming an extended lease and so reducing the ground rent to nil effectively via that route.
2. House leaseholders will welcome a simplified procedure, in particular the avoidance of problems around establishing the relevant rateable values.
3. 990 years as a new term will assist leaseholders selling into a market where more modern properties were sold on leases of that length. Landlords will be relieved to see that their redevelopment break right remains, particularly where the majority of flats in a building have extended under the old regime so that the remaining few don’t stymie that prospect.
4. Voluntary lease extensions may become a thing of the past as it will be safer for the landlord to require the leaseholder to go through the statutory process than to entertain granting this for fear that the voluntary lease doesn’t fully reflect the statutory terms, so leaving it with potential liability to the leaseholder.
That may be a problem for leaseholders in the process of selling as they will often only turn their mind to extending the lease at the point they agree a sale and then need to conclude that quickly, potentially tying it in with the completion of the sale.
Buyers aren’t always relaxed about taking on the benefit of a lease extension claim as they then have the uncertainty as to what the premium and costs will be. So whether this is a problem for leaseholders will depend on how the Government deals with the valuation options the Commission has put to it earlier; if the premium is accurately predictable at the outset of a claim then on a sale it will be possible to agree a price to reflect that, particularly when there won’t be landlord’s costs to pay if the premium is set based on market value.
5. Streamlining i.e., with regard to mortgages will help reduce leaseholder’s costs on enfranchisement.
6. Landlord’s costs of dealing with a claim will be increased by the changes in the process, i.e. needing to notify other landlords of the claim, but their ability to recoup their costs will either disappear (if the premium is based on market value) or be reduced potentially (if non-market value).
7. The patching up of problem areas such as the grant of rights that benefit the existing lease is a boon for leaseholders, firstly as to fixing the problem itself and secondly reducing the costs they stand to incur in connection with the process.
8. The right of individual freehold acquisition is new and will be a boon for those holding a number of residential units via a single lease wrapper i.e., a lease of a building. For example leaseholders of student accommodation potentially and registered providers who often hold entire buildings on a single lease.
9. Leaseholders of houses currently precluded from enfranchising the freehold by the absence of ownership of part of the building such as the roof will welcome the extension of enfranchisement rights to them. Landlords will be disappointed in equal measure particularly where they have structured the lease to exclude the possibility of an enfranchisement claim, and perhaps accepted a reduced premium to reflect that.
10. The extension of the collective enfranchisement right to multiple buildings will be helpful for estates where individual enfranchisement of buildings would have caused management problems and the like.
11. The right to participate after the event is attractive in principle, particularly for the buyer of a flat in a building where their predecessors chose not to join in the acquisition of the freehold originally, however creating the ability for this may make it harder to obtain participation originally to get a claim off the ground and introduce the complexity the Commission is seeking to remove from the process so we question whether that will ultimately be introduced as a right.
12. Allowing those with three flats or more in a building to count as a qualifying tenant will bring more buildings into qualification for the right to enfranchise and so will be welcomed by leaseholders.
13. Increasing the threshold of non-residential use to 50% before a building is disqualified from enfranchisement is a boon for leaseholders but the arguments will remain as to the comparative for residential and non-residential areas at the margins.
14. Removing the need for leaseholders to wait for two years before being able to make a lease extension claim is a boon for them but probably won’t solve the problem facing sellers with short leases described above. Messaging this change as an early stage will hopefully avoid unfairness to those who have sold recently.
15. Shared ownership leaseholders will welcome the extension of the right to extend the lease of their home prior to staircasing to 100% equity.
16. Leaseholders of the National Trust will welcome the extension of lease extension rights to them and no doubt accept the price of a right of first refusal in favour of the National Trust on sale.
17. Community led housing developments exemption from freehold acquisition claims is designed to ensure the integrity of the same.
18. A single procedure for flat and house claims should reduce costs to leaseholders. The ability to know more about the ownership of the building before commencing a claim will be helpful i.e., where the landlord has developed parts but it is unknown how many flats exist within them.
19. Satellite litigation should reduce with the removal of deemed withdrawal for missing procedural deadlines that the leaseholder currently lives in fear of. The same applies to the removal of the risk to landlords failing to give their counter notice on time (currently they are then fixed with the terms proposed by the leaseholder). That said, landlords may be less good at giving their response notice than they were as this fear has fallen away and so the Tribunal will have more work to do then determining the terms. Their only fear really is that the Tribunal may make an award below that they think they might otherwise have achieved if they had given a response notice and they will now lose the ability, save on very limited grounds to challenge that determination.
20. Claims may lie dormant for much longer than they do under the current regime as the leaseholders won’t suffer an automatic termination of their claim; instead the onus will be on the landlord to apply to the Tribunal to strike it out which they may be reluctant to do in view of the cost of that. Claims may then be forgotten as they will no longer be required to be registered against the landlord’s title and so there is a risk of some confusion and perhaps litigation here depending on the fluctuation in values over time.
